A common discussion with financial planning clients is helping their children get on the property ladder. If clients have a few children, this can be a substantial amount of money that has to be planned for. This is not something that is just happening in Ireland, it is happening all over the developed world. As parents will always help their children out whenever they can, there are a few things to bear in mind when helping out your kids financially.
It’s impossible to give an exact amount for how much to give as everyone’s circumstances is different. But do not put your own future happiness at risk because you gave your children money for property. There are too many cases from the Celtic Tiger of parents who not only gave deposits, but bought houses for their children. A lot of them couldn’t afford to and they ended up working a lot longer than anticipated.
Do not be the sole contributor to the deposit. Your child should also put some money in too. Some lenders won’t give mortgages anyway if the purchaser has shown no record of saving and all the deposit is coming as a gift.
Besides, your child (these are adult children remember) needs to understand the value of money, how to plan and how to save. It is a life lesson for them to be set goals, learn how to be frugal, to save and to sacrifice. It also gives them a sense of accomplishment when they have saved up all that money and reached their target (albeit with a little help from mum and dad).
Some parents think that it may be a good idea to buy a house themselves as an investment, rent it out and then their child can take over the mortgage in the future. This is a terrible idea.
Why? Do not decide for your child where they are going to live. If you are choosing, it is likely going to be close to you. Do your children want to live there? Or what if they fall in love with someone who lives on the other side of the city? Or they move to another county or country to work and want to settle down there?
While most first time buyers don’t go looking for the home of their dreams, they may hate the house you have bought on their behalf. Do your children have the same tastes as you have?
It is also expensive. If you are thinking of buying for your adult kids, you are likely in your 50s/60s. Are you going to have to get a mortgage on the property? Due to your age, it will be a short term one with high repayments. And then there’s tax you have to pay on rental income as well as furnishing the place and paying two sets of solicitor fees, stamp duty. You also have to get independent tax advice on the transfer of property from a parent to a child to make sure it is done correctly and neither party ends up paying penalties in the future. It is not as straight forward as just transferring the property title from one name to another.
There is a huge difference between giving your child a leg up on the property market and funding their lifestyle. If they want to go on holiday, let them save for it or get a loan from a bank. If they want to buy new clothes, let them work for it like everyone else.
As a parent, you will most probably help your children out along. It is important that your children understand the value of money and find their own way in the world too. If they have a good work ethic and do their best, by all means help them out.
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